Friday, July 20, 2012

A no-further-bailouts principle

by Tito Boeri


July 20, 2012

Solving the EZ crisis will almost certainly involve some financial transfers in exchange for some loss of sovereignty. This column suggests a guiding principle for which policies should be under EZ control. Transfers of authority to supranational bodies must make a no-further-bailout clause credible.

Angela Merkel is right. There can’t be solidarity without control. She is also using the right words – “solidarity” and “control”.

Whatever rescue package is ultimately agreed to prevent the collapse of the euro, it will unavoidably involve some ‘solidarity’ transfers from triple-A countries to zero-A countries. The transfer can be concealed to please public opinion, just like transfers to French agricultural workers under the Common Agricultural Policy have long been presented as generic subsidies to exporters and to environmental protection in rural areas. But whatever it is called, it will be a transfer.

The switch from the EFSF (European Financial Stability Facility) to the ESM (European Stability Mechanism) has nothing to do with the size of the two funds. The ESM will at most mobilise €500 billion, 60 more than the EFSF. But contributions to the ESM (in addition to the initial €80 billion) will be guarantees or callable capital not formally increasing the public debt of the different countries. However, these contingent liabilities are still liabilities that would materialise in case some country cannot pay its debt. Call them contingent transfers, but still it is solidarity or contingent solidarity.

Control is also the right word. Any sizeable transfer requires a change in the allocation of tasks within the Eurozone with a stronger role attributed to supranational authorities.


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